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Stock Pick From The Oil & Gas Sector

| 2/21/2013 9:00 PM Thursday


Choice Scrip is a Blue Chip stock pick that is expected to give returns within a 6 months-1 year horizon. The recommendation is based on a fundamental analysis of the company.

The company recommended as the Choice Scrip for this issue is a well established player in the Oil & Gas sector.

HERE IS WHY:

• Will start exploration activity in its Rajasthan block in this quarter

• New Field – Aishwariya, is expected to commence production by FY14

• Exploration activity in Ravva andCambay Valley is expected to further increase oil production

The Oil and Gas sector has seen a good amount of positive news in the last few months. The total decontrol of petrol and now the partial decontrol of diesel prices are expected to bring back some cheer to the financials of OMCs by reducing their losses. This macro development is reason enough to search for investible options in this sector. Within the limited set of players that operate in this field, we would like to recommend Cairn India as our Choice Scrip this fortnight. Why are we so convinced about this company’s ability to deliver value over time? The company has received the much awaited approval to its drill exploration wells in the Rajasthan block. It is already in the process of increasing its oil production capacity and this approval will act as a major booster for it. 


To put it in perspective, Cairn is set to increase its capacity to three lakh barrels of oil Equivalent Per Day (boed) by FY14 from the current two to 2.5 lakh boed. This sets the stage for a super growth era for the company going forward.

Cairn India is a well established player in the Oil and Gas sector. Its production assets are based in Rajasthan, Cambay (Gujarat) and Ravva (KG Basin). In Rajasthan, it has several oil fields, of which Mangala, Bhagyam and Aishwariya are prominent in terms of production numbers. 

Mangala is its largest oil field, which produces around 150000 boed. Bhagyam produces around 20000-25000 boed, while Aishwariya is currently under development and is expected to start production by the end of the next fiscal. Ravva and Cambay Valley (CV) blocks are the other prominent blocks. Its smaller fields add about 500 boed to its total production. Apart from the above, the company has recently discovered hydrocarbons in Sri Lanka and South Africa where it is set to start an intensive drilling program for exploratory appraisal. Once the information about the exact hydrocarbon reserves from these blocks is gathered, it will add to its overall production capacity. 

The stock has come in the limelight because of the approval it received for drilling in the Rajasthan block, which had been pending with the government for over a year and a half now. Cairn is now expecting to drill over 100 wells in the next three years in this block at a run rate of 30 wells per year. It has set up a capex target of USD 1.2 billion of which 50 per cent is for developmental purposes, and the rest is for exploration and appraisal. A more comforting fact is that the company has a cash reserve of USD 2.7 billion in its books.

On the financial front, the company has reported a robust performance for 9MFY13. Its topline grew by 60 per cent to Rs 13160 crore and the net profit was up by 63 per cent to Rs 9356 crore. The EBITDA margins were at a strong 77 per cent.

LAST FIVE QUARTERS (Rs/CR)
Dec '12Sep '12Jun '12Mar '12Dec '11
Net Sales 4277.61 4443.14 4440.03 3651.34 3096.76
Depreciation 482.4 451.52 437.34 401.34 378.72
Other Income 417.56 -563.19 962.72 92.27 112.35
Interest 5.22 18.81 29.47 30.54 24.01
Tax 32.31 69.65 127.06 173.53 118.4
Net Profit 3344.89 2322.18 3825.74 2186.23 2261.93

The stock at the current market price of Rs 310 is available at P/E of 5x. The management has also announced a new dividend policy to distribute 20 per cent of its net profit as dividends, which means each shareholder could get Rs 10 to 11 as dividend, resulting in a yield of 4 per cent on its CMP. 

Also, the company’s financial performance is expected to improve further as it has increased its reserves estimates in the Rajasthan block. With exploration at full throttle and the commissioning of Aishwariya, we see a major revenue upside here and hence advise a ‘buy’ on the stock. The best possible scenario for exiting could roughly be in a year, with a likely appreciation of around 20 per cent.

SHAREHOLDING PATTERN AS ON 31/12/2012
Promoter and Promoter 58.78
Foreign Institutional Investors 14.97
DII 10.5
Others 13.13
Individuals 2.63
GRAND TOTAL 100

 

Find More Articles on: DSIJ Magazine, Choice Scrip, Stock Recommendations, Fundamental Picks, Product, Large Cap

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